c) Gratuity [Sec. 10(10)]: Gratuity is the sum paid by the employer to its employees in appreciation of its past services. Taxability of perquisites are given below for various types of employees:

Government employees

Employees covered underGratuity Act

Any other employee

Fully exempt

Minimum of the following 3 limits:

Minimum of the following 3 limits:

(1) Actual gratuity received, or

(2) 15 day's salary for every completed year, or part thereof exceeding six months (7 day's salary for each season for an employee in a seasonal establishment); or

(3)Rs. 20,00,000

(1) Actual gratuity received, or

(2) Half months average salary of each completed year of service.

(3) Rs.20,00,000

Meaning of Salary:

(i) Basic salary plus Dearness allowance.

(ii) Last drawn salary (average salary of preceding three months in case of piece rated employee)

(iii) No. of days in a month to be taken as 26

Meaning of Salary:

(i) Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover.

(ii) Average salary of last 10 months preceding the month in which event occurs.

(iii) Only completed year of service is to be taken.

d) Municipal Value:

e) Capital Assets:Capital asset means property of any kind held by assessee, whether or not connected with his business or profession. It includes plant and machinery, building – whether business premises or residential, all assets of business, goodwill, patent rights etc. but does not include the following.

1. Stock-in-trade, consumable stores or raw materials held for the purpose of business or profession.

2. Personal movable properties viz. furniture, motor vehicles, refrigerators, musical instruments etc. held for personal use of the assessee or his family. But personal property does not include the following:

ØJewellery

ØResidential house property

ØArchaeological collections, drawings, paintings, sculptures, or any work of art.

3. Rural Agricultural land:

ØLand within the jurisdiction of a municipality or cantonment board having population of 10,000 or more or

In India, Income tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857. Thereafter; several amendments were made in it from time to time. In 1886, a separate Income tax act was passed. This act remained in force up to, with various amendments from time to time. In 1918, a new income tax was passed and again it was replaced by another new act which was passed in 1922.This Act remained in force up to the assessment year 1961-62 with numerous amendments. The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. The Government of India therefore referred it to the law commission in1956 with a view to simplify and prevent the evasion of tax. The law commission submitted its report-in September 1958, but in the meantime the Government of India had appointed the Direct Taxes Administration Enquiry Committee submitted its report in 1956.In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed.

The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies to the whole of India including Jammu and Kashmir.

Central Board of Direct Taxes: CBDT is the apex body of Income Tax Department. It has the power to frame rules underthe control of the Central Government.

Income Tax Law in India

The income tax law in India consists of the following components:

1. Income tax Acts

2. Income tax rules

3. Finance Act

4. Circulars, notifications etc

5. Legal decision of courts.

Income tax Act, 1961: At present the law of income tax in India is governed by the Income Tax Act, 1961 which extends to whole of India, including the Sates of Jammu and Kashmir and Sikkim. It as administered along with other direct taxes by the Central Board of Direct Taxes (C.B.D.T.) The Board has framed various rules for the administration of income tax, which are known as the Income Tax Rules, 1962. They are amended and modified from time to time, as required by the amending Income tax Act. The Income Tax Act, 1961 is having 298 sections and many more subsections and twelve schedules.

Income-tax Rules: The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the purposes of the Act. For the proper administration of the Income-tax Act, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, 1962.

Finance Act: Every year, the Finance Minister of the Government of India presents the Budget to the Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the President of India, it becomes the Finance Act.

Circulars and Notifications: Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of the provisions. These circulars are issued for the guidance of the officers and/or assessee.

Or

(b) What are the different categories of assessee according to their residential status? How would you determine the status of an individual and a firm?4+8=12

Ans: Different categories of assessee: Tax incidence on an assessee depends on his residential status. The residential status of an assessee is determined with reference to his residence in India during the previous year. Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability. Residence and citizenship are two different things. The incidence of tax has nothing to do with citizenship.

On the basis of residential status, assessee are divided into the following categories:

1) RESIDENT: An individual is said to be resident in India if he satisfies any one of the basic conditions mentioned below. Resident assessee are further divided into two categories:

A) Resident and Ordinarily Resident: An individual is said to be resident and ordinarily resident in India if he satisfies any one of the basic conditions and both of the additional conditions.

B) Resident but Not Ordinarily Resident: An individual is said to be resident but not ordinarily resident in India if he satisfies anyone of the basic conditions but not satisfies both of the additional conditions.

2. Non-Resident: An individual is a non-resident in India if he satisfies none of the basic conditions.

Residential Status of an Individual

As per section 6, an individual may be (a) resident and ordinarily resident in India, (b)resident but not ordinarily resident in India, or(c) non-resident in India. The following are the twosets of conditions for determining the residential status of an individual:

Basic conditions:

a) He is in India in the previous year for a period of 182 days or more

OR

b) He is in India for a period of 60 days or more during the previous year and has been in India for a period of 365 days or more during 4 years immediately preceding the previous year.

Note: In the following two cases, an individual needs to be present in India for a minimum of 182 days or more in order to become resident in India:

(a) An Indian citizen who leaves India during the previous year for the purpose of taking employment outside India or an Indian citizen leaving India during the previous year as a member of the crew of an Indian ship.

(b) An Indian citizen or a person of Indian origin who comes on visit to India during the previous year (a person is said to be of Indian origin if either he or any of his parents or any of his grandparents was born in undivided India).

Additional Conditions:

(i) He has been resident in India in at least 2 out of 10 previous years [according to basic conditionnoted above] immediately preceding the relevant previous year.

AND

(ii) He has been in India for a period of 730 days or more during 7 years immediately preceeding the relevant previous year.

RESIDENT: An individual is said to be resident in India if he satisfies any one of the basic conditions.

Resident and Ordinarily Resident: An individual is said to be resident and ordinarily resident in India if he satisfies any one of the basic conditions and both of the additional conditions.

Resident but Not Ordinarily Resident: An individual is said to be resident but not ordinarily resident in India if he satisfies anyone of the basic conditions but not satisfies both of the additional conditions.

Non-Resident: An individual is a non-resident in India if he satisfies none of the basic conditions.

Residential Status of a Hindu Undivided Family

As per section 6(2), a Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.

HUF: Resident or Non-Resident

A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.

A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the family (including successive karta) satisfies the following two additional conditions as laid down by section 6(6)(b).

Additional condition (i) Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in immediately preceding the relevant previous year)

Additional condition (ii) Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year.

If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.

4. (a) Explain in brief at least fifteen incomes which are exempted u/s 10 of the Income-tax Act, 1961.11

Ans: Income Exempted from tax under Sec. 10:

1. Agricultural Income: Income from agriculture is exempt. However, if the net agricultural income exceeds Rs.5,000, it is taken into account for determining the rates of income-tax on incomes liable to tax. [Sec.10 (1)]

2. Receipt from Hindu Undivided Family: Any sum received by an individual as a member of Hindu Undivided Family where such sum has been paid out of the income of the family or in the case of any impartible estate, where such sum has been paid out of the income of the estate belonging to the family, irrespective of whether tax is payable or not by the HUF on its total income. However, certain receipts from HUF are liable to be clubbed in the hands of an individual member u/s 64(2). [Sec.10 (2)]

3. Partner’s Share in the Firm’s Income: In the case of a person being a partner of a firm which is separately assessed as such, partner’s share in the total income of the firm is exempt. Share of a partner of the firm shall be computed by dividing the total income of the firm in the profit sharing ratio mentioned in the Partnership Deed. [Sec.10 (2A)]

4. Value of Leave Travel Concession: Value of any leave travel concession or assistance received by or due from the employer to employee (including noncitizens) and his family (spouse, children and dependent- father, mother, brother, sister dependent on him) in connection with his proceeding on leave or after retirement or termination of his service to any part of India. [Sec.10(5)]

5. Leave Encashment : Any payment received by a Central/State Govt. employee, as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of his retirement whether o superannuation or otherwise. However, in case of other employees the exemption is available subject to specified limits. For details see ‘Receipts Exempt from Income Tax’ in the chapter ‘Salary’. [Sec.10(10AA)]

6. Compensation to Employee: Any compensation received by a workman under Industrial Disputes Act or under any other Act or rules, order or notification issued there under or under any standing order or under any award, contract of service or otherwise at the time of his retrenchment is exempt to the extent such compensation is in accordance with Section 25F (b) of Industrial Disputes Act, subject to a maximum of Rs.5,00,000.

8. Payment from Sukanya Samriddhi Account: Any payment from an account under the Sukanya Samriddhi Account Rules, 2014 [Sec.10(11A)]

9. Accumulated Balance of Recognised Provident Fund: Any accumulated balance due and becoming payable to an employee from a recognised provident fund, on fulfillment of any of the following conditions:

(i) If he has rendered a continuous services of five years or more; or

(ii) If his service, though not as stated in (i) above, has been terminated due to his ill-health or by the contraction or discontinuation of his employer’s business or any other cause beyond his control; or

(iii) If on cessation of his employment, his accumulated balance is transferred to recognised provident fund maintained by his new employer;

10. House Rent Allowance: Any special allowance granted to an assessee by the employer to meet expenditure incurred on payment of rent for residential accommodation subject to prescribed limits and conditions. [Sec.10(13A)]

11. Allowances of MPS and MLAs:

(a) Any daily allowance received by Members of Parliament or any State Legislature.

(b) Any allowance received by any Member of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986.

(c) Any constituency allowance received by any member of any State Legislature under any Act or rules made by it. [Sec.10(17)]

12. Income of a Professional Association set up for the control, supervision, regulation or encouragement of the professions of law, medicine, accountancy, engineering, architecture or other notified profession (i.e. Company Secretary, Chemistry, Materials Management and Town Planning), subject to specified conditions. [Sec.10(23A)]

13. Income of a New Agency [i.e. Press Trust of India Ltd.] set up in India, whichapplies its income or accumulates it for application solely for collection anddistribution of news and does not distribute its income in any manner to itsmembers. [Sec.10(22B)]

14. Income of a Minor Child liable to be included in income of his parent u/s 64(1A) isa exempt up to a maximum of Rs.1,500 per minor child. [Sec.10(32)]

15. Any Capital gain arising to an individual /HUF on compulsory acquisition ofan agricultural and in urban areas (i.e. situated within the jurisdiction of amunicipality or a cantonment board having population of 10,000 or more or withinspecified distance from the local limits of such municipality/board), provided thecompensation/consideration is received on or after 1.4.2004 and the land was beingused for agricultural purposes by the HUF/individual or his parent(s), during theperiod of two years immediately before acquisition. [Sec.10(37)]

A deduction of such profits and gains as are derived by a hundred percent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. The Provisions of Sec 10B are given below:

1. CONDITIONS TO BE SATISFIED: This section applies to any undertaking which fulfils all the following conditions, namely:

g)It manufactures or produces any articles or things or computer software;

h)It is not formed by the splitting up, or the reconstruction, of a business already in existence:

i)No deduction under this section shall be allowed to an assessee who does not furnish a Return of his Income on or before the due date specified under sub-section (1) of section 139.

j)Should not be formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking

k)It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

l)Audit Report should be submitted in Form No. 56G.

2. AMOUNT OF DEDUCTION: If the aforesaid conditions are satisfied , the deduction u/s 10B may be computed as under : (Profit of the Business of the undertaking X Export turnover)/Total Turnover of the business.

3. PERIOD OF DEDUCTION: This deduction shall be allowed for a period of 10 consecutive Assessment Years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles, or things or computer software. No deduction under section 10B shall be allowed to any undertaking from the assessment year beginning on the 1st day of April, 2010 and subsequent years.

4. TRANSFER UNDER A SCHEME OF AMALGAMATION OR DEMERGER: In case an undertaking eligible for deduction under this section is transferred, before the expiry of the specified period, to another Indian company in a scheme of amalgamation or demerger:

(a) No deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or demerger takes place ; and

(b) The provisions of this section shall apply to the amalgamated or the resulting company as if the amalgamation or demerger had not taken place.

2) FREE TRADE ZONE (FTZ)[ Section 10A]

1. CONDITIONS TO BE SATISFIED: In order to get deduction, an undertaking must satisfy the following conditions:

Condition 1:

It must begin manufacture or production in free trade zone :

It has begun or begins to manufacture or produce during the previous year relevant to the assessment year—

(a) commencing on or after 1-4-1981, in any free trade zone; or

(b) commencing on or after 1-04-1994, in any software technology park or electronic hardware technology park or;

(c) commencing on or after the 1-04-2001 in any special economic zone;

Conditions 2 :

It should not be formed by splitting / reconstruction of business.:

Conditions 3 :

It should not be formed by transfer of old machinery: it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Conditions 4 :

Saleconstruction should be remitted to India in convertible foreign exchange.:

Saleconsideration should be remitted to India in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.

Condition 5 :

Report of Chartered Accountant :

The deduction under [this section] shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed Form 56 , along with the return of income, the report of an Chartered Accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.

Condition 6 :

Return of income should be submitted in time.

2. AMOUNT OF DEDUCTION – GENERAL PROVISIONS: If the aforesaid conditions are satisfied , the deduction u/s 10A may be computed as under :

Profits of the business of eligible undertaking = Export Turnover of eligible undertaking/Total Turnover of eligible undertaking.

3. PERIOD AND RATE OF DEDUCTION: Out of the total income of an assessee a deduction of 90% of such profits and gains as are derived by an undertaking from the export of articles, or things or computer software shall be allowed. Rate of deduction for unit set up in Special Economic Zone on or after 1-4-2003 shall be as follows for first 10 assessment years:

First 5 Years –100 % of profits and gains.

Next 2 Years: 50% of such Profit and Gains is deductible for further 2 assessment years.

Next 3 Years: for the next three consecutive assessment years, so much of the amount not exceeding 50% of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account.

4. TRANSFER UNDER A SCHEME OF AMALGAMATION OR DEMERGER: In case an undertaking eligible for deduction under this section is transferred, before the expiry of the specified period, to another Indian company in a scheme of amalgamation or demerger:

(a) No deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or demerger takes place ; and

(b) The provisions of this section shall apply to the amalgamated or the resulting company as if the amalgamation or demerger had not taken place.

5. (a) Mrs. Shilpa is employed in HL Ltd. as marketing officer at Vijayawada. She resigned from the job on 31.07.2017. Her salary particulars are as follows:

Pay

DA

CCA

Conveyance allowance

Rs. 25,000 p.m.

Rs. 12,500 p.m.

Rs. 500 p.m.

Rs. 1,000 p.m.

She claims to have spent 75% of this in the performance of her duties. From 01.08.2017, she joined XYZ Ltd. in Hyderabad. Her salary particulars from her new employer are as follows:

Pay

DA

CCA

HRA

Rs. 27,000 p.m.

Rs. 13,500 p.m.

Rs. 700 p.m.

Rs. 8,000 p.m. (she pays Rs. 12,000 p.m. as rent

She and her employer both were contributing @ 14% of salary towards Recognized Provident Fund. Compute the salary income of Mrs. Shilpa for the Assessment Year, 2018-19, if her salary is due on last date of the month. 11

Ans: Follow our YouTube Channel for solution

Or

(b) Explain in brief the following items as per the Income-tax Act, 1961 (any two): 5.5x2=11

1)House Rent Allowance.

2)Statutory Provident Fund.

3)Entertainment Allowance to Government Employees.

Ans: 1) House Rent allowance [Sec.10 (13A)] : House rent allowance (HRA) receivedby an employee from his employer is an exempted income. If the actual houserent allowance received by the employee is in excess of the lowest limit asprescribed, the excess sum will be taxable salary. HRA is exempt from tax to thelower of the following.

If the employee is living in his own house or in a house where he is notpaying any rent, HRA is fully taxable.

Salary for this purpose means basic salary and dearness allowance if the terms ofemployment so provide. It also includes any commission based on a fixed percentage ofturnover achieved by the employee, as per the terms of the service contract. However, itexcludes all other allowances and perquisites. Relevant period means the period forwhich the accommodation is occupied by the employee. The assessee shall be requiredto produce the rent receipts in proof of actual payment, for the purpose of regularassessment, in all cases. However, for the purpose of claiming deduction of HRA atsource, employees drawing HRA up to Rs.3,000 p.m. are exempted from production ofrent receipts. W.e.f. 1.6.2016, for the purpose of claiming deduction of HRA at source,the employee shall be required to furnish in Form 12BB, the name, address and PAN ofthe landlord(s), if the aggregate rent paid during a previous year exceeds Rs.1 lakh.

2) Statutory Provident Fund: This Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees. Provisions of Income Tax Act for such provident fund are stated below:

Particulars

SPF

1. Employee's/ assessee's contribution

Deduction u/s 80C is available from gross total income subject to the limit specified therein

3) Entertainment Allowance: Entertainment allowance is fully taxable for all private sector employees. However, government employees are eligible for exemption if the allowance is included in the gross salary. In case of government employee’s a deduction is allowed u/s 16(ii) at the least of the following:

(a)Statutory limit: 5000

(b)1/5th of basic salary

(c)Actual entertainment allowance

6. (a) A house was completed on April 1, 2017 and the following information is available about this house:

Municipal value of the house

Fair rental value of the house

Actual rent

Municipal taxes

Rs. 30,000 p.a.

Rs. 32,000 p.a.

Rs. 4,000 p.m.

Rs. 6,000 p.a.

Let out for the period 01.04.2017 to 31.12.2017 and self-occupied from 01.01.2018 onwards:

Rs.

Fire Insurance Premium

Land Revenue

Interest on Loan for the period:

(1) 01.04.2014 to 31.03.2017

(2) 01.04.2017 to 31.03.2018

3,600

6,000

45,000

15,000

Calculate Income from House Property for the Assessment Year, 2018 – 19. 11

Ans: Follow our YouTube Channel for solution

Or

(b) Explain the following in brief (any two): 5.5x2=11

1)Exempted Income from House Property.

2)Deemed owner of House Property.

3)Recovery of Unrealized Rent.

Ans: 1) Properties exempted from tax under the head income from house property (Sec. 10)

1) Income from a farm house.

2) Annual value of one palace in the occupation of an ex-ruler.

3) Property income of a local authority.

4) Property income of an approved scientific research association.

5) Property income of an educational institution and hospital.

6) Property income of a registered trade union.

7) Income from property held for charitable purposes.

8) Property income of a political party.

9) Income from property used for own business or profession.

10) Annual value of two self occupied property.

2) Deemed Ownership

Under Section 27 of the Income Tax Act the assessee in the following cases is deemed to be the owner of the house property, though not owner of the house property:-

(a) If an individual transfers a house property to his or her spouse (except in connection with an agreement to live apart) or to a minor child (except a married daughter) without adequate consideration, he is deemed as the owner of the property for tax purposes.

(b) The holder of an Impartible Estate is deemed to be the owner of all the properties comprised in the estate.

(c) A member of a co-operative society, company or association of persons, to whom a property or a part thereof is allotted or leased under a house building scheme of the society, company or association, is deemed to be the owner of such property.

(d) A person who has acquired a right in a building by way of a lease for a term of not less than 12 years, is the deemed owner of the property. This provision does not cover any right by way of a lease renewable from month to month or for a period not exceeding one year.

3) Treatment of unrealized rent

For the purpose of determining the Annual value, the actual rent shall not include the rent which cannot be realized by the owner. However, the following conditions need to be satisfied for this:

(a) The tenancy is bona fide;

(b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property.

(c) The defaulting tenant is not in occupation of any other property of the assessee;

(d) The assessee has taken all reasonable steps for the recovery of the unpaid rent or satisfied the assessing Officer that legal proceedings would be useless.

(e) Unrealised rent of earlier years is not deductible.

Treatment of unrealized rent recovered

Where any rent cannot be realized, and subsequently if such amount is realized, such an amount will be deemed to be the income from house property of that year in which it is received. However, in the cases where unrealized rent is subsequently realized, it is not necessary that the assessee continues to be the owner of the property in the year of receipt also.

7. (a) Mr. P.K. furnishes the following particulars for the Previous Year ending 31.03.2018 and requests you to compute the taxable capital gain: 11

1)He had a residential house inherited from father in December 2014, which was acquired by father in 1998 and the fair market value of which as on 01.04.2001 is Rs. 4,00,000.

2)In the year 2006-07, further construction and improvement cost came to Rs. 1,80,000.

3)On 18.09.2017, the house was sold for Rs. 35,00,000. Expenditure in connection with transfer was Rs. 90,000.

4)On 20.12.2017, he purchased a residential house for Rs. 18,00,000.

Cost of inflation index:

2001-02

2004-05

2006-07

2017-18

100

113

122

272

Or

(b) Discuss in detail the provisions of Income-tax Act, 1961 for determination of income from other sources. 11

About Kumar Nirmal PrasadKumar Nirmal Prasad is the founder and CEO of Dynamic tutorials and Services. Dynamic Tutorials and Services is a Leading Coaching Centre of Tinsukia District. We provide complete coaching for Commerece and Arts stream from Class 12 to Master Degree level. Also we have statrted coaching for various competitive exams like RBB, SSC, UGC - NET, State Level Competitive Exams.